Debt Financing

A summary of the Company’s long term debt as of March 31, 2014 is as follows (dollars in thousands):



			Interest
Fixed Rate Debt	Balance		Rate		Maturity

Lender
Great Western Bank	$	10,768	4.95	%	6/2014
GE Franchise Finance Commercial LLC		17,170	7.17	%	12/2014
Citigroup Global Markets Realty Corp		12,177	5.97	%	11/2015
Great Western Bank		7,970	5.00	%	6/2015
Trevian Capital		8,300	12.50	%	6/2015
Elkhorn Valley Bank		2,716	5.50	%	6/2016
First State Bank		574	5.50	%	9/2016
GE Franchise Finance Commercial LLC		11,695	7.17	%	2/2017
Cantor		6,014	4.25	%	11/2017
Morgan Stanley		29,399	5.83	%	12/2017
Total fixed rate debt	$	106,783

Variable Rate Debt

Lender
RES, net of unamortized debt discount of $134		1,866	7.23	%	6/2015
GE Franchise Finance Commercial LLC		7,149	3.74	%	2/2018
GE Franchise Finance Commercial LLC		2,094	4.30	%	2/2018
Total variable rate debt	$	11,109

Subtotal debt		117,892

Less: debt associated with hotel properties held for sale		26,843

Total long-term debt	$	91,049

On January 9, 2014, the Company entered into an unsecured convertible loan agreement with RES, whereby the Company may borrow up to $2.0 million from time to time in revolving loans, subject to the conditions therein. The loan’s conversion feature was determined to be an embedded derivative and was bifurcated from the host and recorded as a derivative liability with the offset to debt discount. The loan is recorded at $1.9 million net of the unamortized debt discount and is included in “Long-term debt” on the Consolidated Balance Sheets at March 31, 2014. The discount is being amortized over the term of the applicable notes through July 9, 2015 unless the notes are converted prior to maturity. For the three months ending March 31, 2014, $16,600 of debt discount was amortized and reflected in interest expense in the consolidated statement of operations.

Because the Company did not complete a rights offering of common stock on or before April 15, 2014, RES has the option until July 9, 2015, the maturity date of the loan agreement, subject to any ownership limitations RES may then be subject to, to convert up to $2.0 million of the loan into a number of shares of common stock of the Company (the “Loan Conversion”) determined at the rate per share equal to the greater of (a) the average weighted price of the common stock of the Company for the five trading days preceding the day RES exercises the Loan Conversion, or (b) $1.74 per share, the greater of book or market value of the common stock at the time, and as determined, with respect to Nasdaq Marketplace Rule 5635(d).

Each of the 3,000,000 shares of Series C convertible preferred stock is convertible, in whole or in part, at RES’s option, at any time, but subject to RES’s beneficial ownership limitation, into the number of shares of common stock equal to the $10.00 per share liquidation preference, divided by the conversion price then in effect. If RES exercises the Loan Conversion, and the rate per share of the Loan Conversion is less than $8.00, the current conversion price of the Series C convertible stock, then pursuant to the terms of the Series C convertible preferred stock, will be adjusted downward to the rate per share of the Loan Conversion. If the conversion price of the Series C convertible preferred stock is adjusted, then pursuant to the terms of warrants held by RES to purchase up to 3,750,000 shares of common stock, the exercise price of the warrants, currently $9.60, will be adjusted to 120% of the adjusted conversion price of the Series C convertible preferred stock.

As of March 31, 2014, the outstanding balance due on the RES loan was $2.0 million. Per the loan agreement the annual interest rate was variable at LIBOR plus 700 basis points but increases to a 12.5% fixed rate back to the origination date of the loan if a rights offering was not completed by April 15, 2014. At this time the Company is in the process of initiating a rights offering, but a rights offering was not concluded as of April 15, 2014, so the interest rate increased per the agreement. $23,163 of interest was paid in the three months ending March 31, 2014 and $16,854 of interest was accrued to reflect the increased rate.

Using the 12.5% interest rate and $16,854 of amortization of the debt discount for the three months ending March 31, 2014, the effective interest rate was 18.3% as of March 31, 2014.

On March 10, 2014 the Company sold a Super 8 in Shawano, Wisconsin (55 rooms) for $1.1 million. Proceeds were used to pay off the associated loan and reduce the balance of the revolving credit facility with Great Western Bank.

On March 14, 2014, we received a waiver from GE Franchise Finance Commercial LLC (“GE”) for non-compliance with our before dividend fixed charge coverage ratio (FCCR) covenant with respect to our GE-encumbered properties (actual of 1.25:1 versus requirement of 1.30:1), our before dividend consolidated FCCR covenant (actual of 0.98:1 versus requirement of 1.20:1), and our after dividend consolidated FCCR covenant (actual of 0.84:1 versus requirement of 1.00:1) in each case, as of March 31, 2014.

In connection with the waiver, our loan facilities with GE were also amended to require that, through the term of the loans, we maintain: (a) a minimum before dividend FCCR with respect to our GE-encumbered properties (based on a rolling 12-month period) of 1.10:1 as of June 30, 2014, which requirement increases periodically thereafter to 1.20:1 as of December 31, 2014; (b) a maximum loan to value ratio with respect to our GE-encumbered properties of 70% as of June 30, 2014, which requirement decreases periodically thereafter to 60% as of December 31, 2014; (c) a minimum before dividend consolidated FCCR (based on a rolling 12-month period) of 0.70:1 as of June 30, 2014, which requirement increases periodically thereafter to 1.00:1 as of December 31, 2014; and (d) a minimum after dividend consolidated FCCR (based on a rolling 12-month period) of 0.75:1 as of June 30, 2014, which requirement increases periodically thereafter to 1.00:1 as of December 31, 2014.

The GE amendment, among other things, also: (a) provides that the consolidated FCCRs are not required to be tested as of the end of any fiscal quarter if the loan to value ratio with respect to our GE-encumbered properties is 60% or less; (b) implements changes beneficial to the Company regarding release of collateral, prepayment fees and loan reamortizations; (c) requires that any variable rate loans remaining outstanding as of December 31, 2014 be converted to fixed rate loans bearing interest at 4.75%; and (d) required payment by June 30, 2014 of a $380,000 modification fee.

At March 31, 2014, the Company had long-term debt of $91.0 million associated with assets held for use, consisting of notes and mortgages payable, with a weighted average term to maturity of 2.5 years and a weighted average interest rate of 6.3%. The weighted average fixed rate was 6.4%, and the weighted average variable rate was 3.3%. Debt is classified as held for use if the properties collateralizing it are included in continuing operations. Debt is classified as held for sale if the properties collateralizing it are included in discontinued operations. Debt associated with assets held for sale is classified as a short-term liability due within the next year irrespective of whether the notes and mortgages evidencing such debt mature within the next year. Aggregate annual principal payments on debt associated with assets held for use for the remainder of 2014 and thereafter, and debt associated with assets held for sale, are as follows (in thousands):



	Held For Sale		Held For Use		TOTAL
Remainder of 2014	$	26,843	$	13,345	$	40,188
2015		0		26,692		26,692
2016		0		4,817		4,817
2017		0		40,734		40,734
2018		0		5,461		5,461
Thereafter		0		0		0
	$	26,843	$	91,049	$	117,892

At March 31, 2014, the Company had $40.2 million of principal due in 2014. Of this amount, $30.5 million of the principal due is associated with either assets held for use or assets held for sale, and matures in 2014 pursuant to the notes and mortgages evidencing such debt. The remaining $9.7 million is associated with assets held for sale and is not contractually due in 2014 unless the related assets are sold. The maturities comprising the $30.5 million consist of:

a $10.8 million balance on the revolving credit facility with Great Western Bank;

a $14.7 million balance on a mortgage loan with GE;

a $2.5 million balance on a mortgage loan with GE; and

approximately $2.5 million of principal amortization on mortgage loans.

The Company’s plan is to refinance the debt with Great Western Bank. The seven hotels securing the loans with GE are held for sale, and if sold, we believe that the net proceeds from the sale of the hotels would be sufficient to satisfy the debt with GE. If the hotels are not sold, the Company will attempt to refinance the debt with GE. If we are unable to refinance our debt with GE, we may be forced to sell the hotels on disadvantageous terms which could compel us to file for reorganization.

We are required to comply with certain financial covenants for some of our lenders. As of March 31, 2014, we were either in compliance with our financial covenants or obtained waivers for non-compliance (as discussed above). As a result, we are not in default of any of our loans.